(Rewrites top, adds analyst, industry comment, share prices)
LONDON Feb 27 Shares in Britain's biggest motor insurers Admiral and Direct Line tumbled on Monday after the government announced new rules that push up lump sum payments for personal injury claims, a change the industry's trade body described as "crazy".
Britain's Ministry of Justice cut the discount rate used to calculate lump sum payouts to minus 0.75 percent on Monday, from 2.5 percent, a much bigger cut than the industry had expected.
The industry consensus had been for a cut to not less than plus 1 percent.
A reduction in the discount rate is expected to force insurers to pay out more in cash to personal injury claimants now to ensure that returns over their lifetime meet the awarded compensation.
"The current legal framework makes clear that claimants must be treated as risk-averse investors, reflecting the fact that they may be financially dependent on this lump sum, often for long periods or the duration of their life," the Ministry of Justice said.
Barrie Cornes, analyst at Panmure Gordon, described the move as a "huge blow to insurers".
Admiral estimated the net financial impact on 2016 reported profit at 70 million-100 million pounds ($87 mln-$124 mln).
Its shares were down 4.1 percent at 1,793 pence at 0935 GMT.
Direct Line said the new rate would reduce 2016 profit before tax by 215 million-230 million pounds. Its shares fell 6.8 percent to 340 pence.
Shares in mid-cap motor insurer Esure, however, were up 3.7 percent at 215 pence, recovering initial losses after the company estimated the net impact of the rule change for 2017 would be 1 million pounds.
Rival mid-cap insurer Hastings said the change would lead to a one-off pre-tax charge of 20 million pounds in its 2016 results.
Its shares fell 0.5 percent to 230.4 pence.
The Association of British Insurers, calling the move a "crazy decision" said in a statement motor and liability premiums would rise as a result of the change. Consultants PwC estimated annual motor premiums would rise by 50-75 pounds on average.
The discount rate is calculated based on real yields on index-linked gilts. The change will become effective March 20 although the Ministry of Justice said that in coming months it would also consult on whether this was the appropriate way to calculate the rate.
The change will also affect Britain's health service. The government has committed to making sure there is enough money to cover changes to hospitals' clinical negligence costs, the justice ministry said. ($1 = 0.8050 pounds) (Reporting by Carolyn Cohn; Additional reporting by Esha Vaish in Bengaluru; Editing by Rachel Armstrong and Susan Fenton)